Huff v. Comm'r Irs

• Decision Date: 20 February 2014
• Docket Number: 11–10617,Nos. 11–10608,11–10618.,s. 11–10608
• Citation: 743 F.3d 790
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: George C. HUFF, Petitioner, Government of the United States Virgin Islands, Movant–Appellant, v. COMMISSIONER OF IRS, Respondent–Appellee. Barry P. Cooper, Petitioner, Government of the United States Virgin Islands, Movant–Appellant, v. Commissioner of IRS, Respondent–Appellee. Patrick A. McGrogan, Petitioner, Government of the United States Virgin Islands, Movant–Appellant, v. Commissioner of IRS, Respondent–Appellee.

743 F.3d 790

George C. HUFF, Petitioner,

Government of the United States Virgin Islands, Movant–Appellant,

v.COMMISSIONER OF IRS, Respondent–Appellee.

Barry P. Cooper, Petitioner,

Government of the United States Virgin Islands, Movant–Appellant,

v.Commissioner of IRS, Respondent–Appellee.

Patrick A. McGrogan, Petitioner,

Government of the United States Virgin Islands, Movant–Appellant,

v.Commissioner of IRS, Respondent–Appellee.

Nos. 11–10608, 11–10617, 11–10618.

United States Court of Appeals,Eleventh Circuit.

Feb. 20, 2014.

Gene C. Schaerr, Winston & Strawn, LLP, Washington, DC, for Movant–Appellant.

Joseph A. Diruzzo, III, Fuerst Ittleman David & Joseph, PL, Miami, FL, for Petitioner.

Jennifer Marie Rubin, Gilbert Steven Rothenberg, U.S. Department of Justice, Washington, DC, for Respondent–Appellee.

Petitions for Review of a Decision of the United States Tax Court. Agency Docket Nos. 12942–09, 11810–10, 11–10618.

Before TJOFLAT, HULL, and KRAVITCH, Circuit Judges.

TJOFLAT, Circuit Judge:

In these consolidated appeals, we review the United States Tax Court's denial of the Virgin Islands' motion to intervene in George Huff's, Patrick McGrogan's, and Barry Cooper's (the “Taxpayers”) proceedings in the Tax Court. ¹ After reviewing the record and considering the parties' arguments, we hold that the Tax Court erred in denying the Virgin Islands' motions to intervene. We accordingly reverse the Tax Court's rulings and remand these cases with instructions that the Tax Court grant the Virgin Islands intervention.

I.

The United States and Virgin Islands operate separate but interrelated tax systems—both based on the rules in the Internal Revenue Code (“I.R.C.”). ²See48 U.S.C. § 1397. The Tax Court proceedings are the product of a disagreement over which government should have received taxes from these Taxpayers, and in what amount.

The Taxpayers are United States citizens who claimed to be “bona fide residents” of the Virgin Islands in 2002, 2003, and 2004. Under the rules governing United States and Virgin Islands taxation, bona fide Virgin Islands residents satisfy both their United States and Virgin Islands tax obligations by filing a return with the Virgin Islands Bureau of Internal Revenue (“BIR”) and paying taxes on their worldwide income to the Virgin Islands. See26 U.S.C. § 932(c); Chase Manhattan Bank v. Virgin Islands, 300 F.3d 320, 322 (3d Cir.2002). By doing so, the Virgin Islands residents are relieved of any obligation to file a return with the Internal Revenue Service (“IRS”) or pay taxes to the United States. Vento v. Director of V.I. Bureau of Internal Revenue, 715 F.3d 455, 465 (3d Cir.2013).

In an attempt to comply with these rules, the Taxpayers filed returns with the BIR for calendar tax years 2002, 2003, and 2004. The Taxpayers reported their worldwide income, which consisted of income from both United States and Virgin Islands sources, and paid taxes on that income to the Virgin Islands. None of the Taxpayers filed a return with the IRS.

In 2009 and 2010, the IRS issued deficiency notices to the Taxpayers for tax years 2002, 2003, and 2004. The IRS claimed, first, that the Taxpayers were not bona fide Virgin Islands residents during those tax years and, therefore, they should have filed returns with the IRS and paid taxes to the United States on the income they reported from United States sources.³ Second, the IRS claimed that some of the Taxpayers' income that they classified as Virgin Islands income on their BIR returns was, in fact, United States income and, therefore, the Taxpayers should have paid taxes to the United States on that income too. Rather than crediting the Taxpayers' federal tax liability with the taxes paid to the Virgin Islands (which the IRS claimed should have been paid to the United States), the IRS issued a deficiency notice for the full amount owed to the United States, plus penalties for failing to file an IRS return and for delinquent payment.

Because the IRS issued the deficiency notices more than three years after the Taxpayers filed their returns, the IRS's collection efforts would normally be barred by the three-year limitations period in I.R.C. § 6501, which runs from the time a taxpayer files “the return required to be filed” for a particular tax year. 26 U.S.C. § 6501(a). According to the IRS, its collection efforts are not barred because the Taxpayers failed to file returns with the IRS—returns they would have been required to file if the claims in the IRS's deficiency notices were in fact true.

The Taxpayers petitioned the Tax Court, challenging the IRS's deficiency notices as time barred and, in the alternative, as incorrect. ⁴ The Virgin Islands moved to intervene in the cases, the Tax Court denied its motions, and the Virgin Islands brought these appeals.

II.

The Tax Court Rules of Practice and Procedure do not provide general rules for intervention by third parties,⁵ but Tax Court Rule 1(b) explains that “[w]here in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.”

The Virgin Islands moved to intervene in the Taxpayers' cases both as a matter of right under Rule 24(a)(2) of the Federal Rules of Civil Procedure and permissively under Rule 24(b)(2). Rule 24(a)(2) allows a third party to intervene as a matter of right if the third party has “an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest.” Rule 24(b)(2) gives the court discretion to permit a government entity to intervene if an existing party's claim or defense is based on a statute or regulation administered by the entity. “In exercising its [Rule 24(b)(2) ] discretion, the court must consider whether the intervention will unduly delay or prejudice the adjudication of the original parties' rights.” Fed.R.Civ.P. 24(b)(3).

The Tax Court denied the Virgin Islands' motions to intervene with virtually identical orders—each citing to the reasoning in Appleton v. C.I.R., 135 T.C. 461, 2010 WL 4457634 (2010) (hereinafter “ Appleton I ”), in which the Tax Court denied the Virgin Islands' motion to intervene in an analogous Tax Court case. In evaluating the Virgin Islands' request for Rule 24(a)(2) intervention, the Appleton I court explained that “[a] review of this Court's jurisprudence reveals that the Court has never recognized intervention of a third party as a matter of right pursuant to Fed.R.Civ.P. 24(a)(2).” 135 T.C. at 466. But, the court did not decide whether Rule 24(a)(2) is available in Tax Court because it held that, even if it were available, the Virgin Islands did not have a qualifying interest that would allow it to intervene. Id. at 466–68. The court also declined to grant permissive intervention because, in its assessment, the Virgin Islands “has neither demonstrated that its participation as a party is necessary to advocate for an unaddressed issue nor shown that its intervention will not delay the resolution of this matter.” Id. at 469.

After the Tax Court cited to Appleton I in its orders in the Taxpayers' cases, the Third Circuit reviewed the Appleton I decision and held that the Tax Court abused its discretion in denying the Virgin Islands' motion for permissive intervention.⁶Appleton v. C.I.R, 430 Fed.Appx. 135, 138–39 (3d Cir.2011) (hereinafter “ Appleton II ”). The Third Circuit concluded that the Tax Court had applied the wrong legal standard under Rule 24(b)(3), which requires a court to consider “whether the intervention will unduly delay or prejudice the adjudication of the original parties' rights.” Id. at 137 (quoting Fed.R.Civ.P. 24(b)(3)) (emphasis added). In requiring the Virgin Islands to show that its participation was “necessary” and “will not delay” the proceedings, the Tax Court had effectively raised the standard for permissive intervention. Id. at 138.

Our analysis might be brief if not for the IRS's ongoing efforts to defend Appleton I. Before the Third Circuit decided Appleton II, the Tax Court cited to Appleton I in several other cases like the Taxpayers' in orders denying the Virgin Islands' motion to intervene. After Appleton II, the IRS, taking the position that Appleton II had been wrongly decided, continued to defend the Appleton I decision. See generally IRS Office of Chief Counsel, Action on Decision No. 2011–04 (Nov. 18, 2011) (“The Service will not follow the Third Circuit's nonprecedential opinion in Appleton [ II ] in any pending or future litigation, including any case appealable to the Third Circuit.”). As a result, two more courts of appeals have had to deal with Appleton I. The Eighth Circuit agreed with the Third Circuit's analysis and held that the Tax Court, in Appleton I, applied the wrong legal standard for permissive intervention. Coffey v. C.I.R., 663 F.3d 947, 951–52 (8th Cir.2011). But the Fourth Circuit split from the Third and the Eighth, holding that the Tax Court applied the correct permissive intervention standard and also correctly denied intervention of right. McHenry v. C.I.R., 677 F.3d 214, 224–27 (4th Cir.2012).

Thus, a single Tax Court decision has produced a split of authority in an area of law in which uniformity is of particular importance.⁷ As it stands, the Virgin Islands' ability to intervene in a Tax Court case depends on the geographic residency of the taxpayer.

With the benefit of our sister courts' reasoning, we now turn to our own examination of Appleton I. We begin with the Tax Court's decision to deny the Virgin Islands' intervention under Rule 24(a)(2).

III.

We review a trial court's denial of intervention of right de novo. Sierra Club, Inc. v....